Qwest Communications International Inc.Q

Morningstar Rating

Stock Research and Analysis

by Michael Hodel, CFA

Qwest Communications has demonstrated an impressive ability to cut costs over the past year and a half, allowing the firm to continue pumping out solid cash flow in the face of sharply declining revenue. Revenue eventually needs to stabilize, however, Read more

Bulls Say

Qwest is still the dominant local phone company in its 14-state region, providing the firm with a fairly steady source of cash flow. The firm has used this cash flow, along with asset sales, to repair its balance sheet and is now in a position to invest selectively in network upgrades to remain competitive.

The strength of Qwest's local and long-distance assets is evident in the firm's success with the federal government's Networx program--the firm was one of three carriers selected to participate. Networx spending is expected to exceed $40 billion over 10 years.

A sizable portion of Qwest's local phone business is located in rural areas that face less competition than in big cities. These operations generate good cash flow and could be sold off at some point to further strengthen the balance sheet or return value to shareholders.

Qwest is focusing its network spending where it can add the most value: improving Internet access and other data services. The firm will continue to provide television services via a partnership with DirecTV DTV, arguably the best offering in the business. Read more

Bears Say

Qwest's local phone business--the firm's primary source of cash flow--is in a steady state of decline. By our estimate, the percentage of households in the firm's territory that subscribe to its phone service has declined to less than 50% from more than 95% since the end of 2001.

Unlike AT&T and Verizon, which are building networks capable of offering TV services across large portions of their territories, Qwest's upgrade plans remain modest. If the firm holds back network spending too long, it may fall too far behind cable competitors.

Qwest spent $1.6 billion during 2007 and 2008--more than half of free cash flow--buying back shares at an average price of about $7 per share. The firm would have been better served paying down debt to prepare for potential competitive pressure than buying back stock at high prices.

Unlike its regional Bell peers, Qwest lacks a wireless business of its own. Reselling wireless service is not very profitable and may not deliver the type of retention benefit management hopes. Read more

Strategy

Qwest has emphasized customer service as a means of retaining customers and, like other phone companies, is pushing service bundles to retain customers. CEO Edward Mueller increased the firm's capital Read more

Management

Dick Notebaert, who took the helm at Qwest in 2002 and did a great job of putting the firm back on reasonably solid footing, retired during 2007. Edward Mueller replaced Notebaert as chairman and CEO. He has extensive telecom experience and served as Read more

Profile

Qwest is the fourth-largest fixed-line local phone company in the nation, serving about 11 million phone lines across its 14-state territory. The firm also owns a nationwide Read more

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